The Sales Hacker Podcast
The Sales Hacker Podcast

Episode · 3 years ago

64. How to Evaluate a SaaS Company and Align Your Sales Funnels w/ David Skok

ABOUT THIS EPISODE

This week on the Sales Hacker podcast, we speak with David Skok. He is one of the pioneers of SaaS. He is a serial entrepreneur and started his first business in 1977. Three of the four businesses that he was involved with went on to IPO. He is an early investor in HubSpot and Zendesk, leading the way to the development and language of SaaS. He's on the pod today chatting about aligning your SaaS company for success. 

One, two, one, three, three, hey everybody, welcome to the salesacker podcast. It is your friendly neighborhood podcast host and Impresario, Sam Jacobs. I'm the founder of revenue collective. That's the business that I run when I am not hosting this podcast. Revenue Collective is a global community of revenue executives and customer facing walls all over the world that are coming together online by a slack and other mechanisms and offline by a series of events, to accelerate each other's careers. We're at four hundred people, if you can believe it. We were, I think, fifty people a year ago, maybe forty. So we're growing really, really rapidly. We had our first members from Berlin, from Tel Aviv, from Paris. In addition to outreach that I've received, they may be members at the time that you're listening from Barcelona, Oslo, Norway. So we're growing rapidly. It's incredibly exciting and PS of sixty six, so it's going great. Now today's show. Today's show is David Scott. You should know who David is. If you don't, that's on you. David is one of the pioneers of Sass he has a serial entrepreneur. He started his first business in one thousand nine hundred and seventy seven. Three of the four businesses that he was involved with went on to IPO. He's an incredibly successful entrepreneur and an investor, one of the early investors in hub spot and Zendesk, including a bunch of other businesses, and he really developed the language of Sass. In many ways he pioneered the the three one LTV to CAG ratio, if you can believe it. So this is this is a get. This is one of the great interviews and the end really, really informative. So I'm glad you're here. Before we listen to David, we want to thank our sponsors. We've got two sponsors, congas. The first one the leading end to end digital document transformation suite. With Conga you can simplify documents, automate contracts and execute e signature so you can focus on accelerating sales cycles and closing business faster. Go to GOCOMOCOM forward sales hacker for more information. Our second sponsor is the company that you know and love, outreach dio, the leading sales engagement platform. Outreach support sales reps by enabling them to humanize communication at scale, from automating the soul sucking manual work that eats upselling time to providing action oriented tips on what comms are working best. Outreach has your back. Now, without further ado, let us listen to David Scotch. Hey, everybody, it's Sam Jacobs. Welcome back to the sales hacker podcast. We've got a very, very special guest on the show today. Probably some some might call him the godfather of SASS, other people might call him just the father assass. It depends on your generation. But one of the most wellknown thinkers, investors entrepreneurs focused on the entire sort of growth and evolution of the recurring revenue business model. I'm talking about David Scott. David is best known for his blog for Entrepreneurscom, which covers many start up talk books, such as Sass and how to build a repeatable, scalable and profitable growth machine. He's a serial entrepreneur who found it a total of four companies and did one turn around. Three of those companies went on to IPO. In two thousand and one he joined early stage VC Matrix partners as an investor he's been an early investor, with exits in hub spot, jboss at Iq, tableau, Neteza or tableau, I might have said it wrong. Diligent Technology is cloud, switch, tribe, HR grap cat, open span and then Servio. He serves on the boards of Adams cloud be's Di Gium, namely Salsafi and Zius, or he'll tell me how to pronounce that, and if he focuses on early and stage investments and enterprice software, Sass, cloud computing, open source and more. David, welcome to the show. Hey, so it's great to be here. We are very, very excited. We're going to dive in, but before we do that, although I just read an incredibly impressive bio, there are people out there that, amazingly, are less familiar with your work than others, and so we always start with a section that we call the baseball CAART. So we know your name. We Are you, as your title, general partner, I suppose, at Matrix partners. Yeah, that's right. Yeah, perfect. So tell us about Matrix. What's the how big is the fun?...

What sort of stage of investments do you make? Just tell us a little bit more and give us a little bit more context. Yeah, very quickly, it's a it's a thirty five year old thumb. It does series a stage investments. We are onto fund eleven and we always raise about four hundred and fifty million dollar fund and we also have funds that are operationally in China and in an in India, and child that is being the really hot market to have been in for the last ten years or so. So it's actually been great to be in there, as well as the state's again, for the folks that aren't as familiar with your background, I just rattled off, you know, a stat that sort of buried in the Bayou, which is that three of the four companies you started you are an operator and three of those four went on to IPO. How did you get into this world? Originally, I think I read in a longer bio that you started your first company the year I was born, one thousand nine hundred and seventy seven. So tell us about you know, your background. It sounds like maybe you're from South Africa. Walk us through your origin story. Yeah, yeah, very briefly, born in South Africa with an English mother and because, apart it was pretty much a key thing going on in South Africa at the time. My parents wanted to get me out of this so they moved me to England to go to school. That when I was eight. So I finished all of my school in England and I was one of the very first people to ever get a computer science degree in the UK. At that time. There was is the first year that to universities of a computer science so I was super excited about that. Really loved the idea of what computers were going to be capable of doing. And I came out of there and wanted to go to mit and had a small problem, which is my father had a strong desire to try to get me into his business. It even cooled at Robert Scotland Sons. So I did a deal with it. I said, listen, I come out and work for you for a year, but at the end of that please pay for my lt continued education. So I went out there and he had a machine tool business and what happened was he put me through the apprentice training course and I saw this new kind of machine that was coming out which used to punch paper tape to direct the machine tool, and I realized that all these guys are on the apprentice training course with me with a typical operators and machine tools and they didn't even pass their high school exams, little then, you know, going through college. And so they had to figure out the geometry to be able to code this machine. And secondly, if they punched a single extra zero in that tape, instead of going ten inches, this hundred thousand dollar machine tool with enormous amount of horsepower would actually go, would go a hundred inches and potentially, you know, do enormous damage to them. And I've seen that happen. It's incredibly dangerous when it does happen. So I sat down I thought what can I what can I do about this? I wrote some piece of software to help automate the programming of those machines and accidentally, without realizing what I'd done, I ended up starting my first business. So no intention of starting it, no, no kind of careful thought about what I was doing at all, but started selling the software and I got stuck in South Africa for a number of years because that business was pretty successful. It grew to about thirty million a year with twenty four percent pretext profits. That had had no venture funding or anything like that. was totally bit strap and this is in the s. So that's inflation adjusted, is fifty, sixty, seventy million a year? Yes, yeah, and it was profitable to so yeah, we had to be profitable. There wasn't such thing as venture funding in South Africa in those days at all, and so it had to make money, other as we were not going to survive from day to day. Wow, then what happened after that? So did you sell that business? How did you know, find our way in the United States? I used it as a vehicle to come to the states. Came over here in eighty three, got venture funding for a US venture that bought the South African entity and at that point in time we'd merged, sorry not merge with morphed from being cam into cad cam and then into really focusing on architectural card which which turned out to be a you know, an area where there was a lot of attention and capability. So came over and eighty three was pre the IBM PC. So this is going to seem really strange for those of you who are who are a...

...lot younger than I am, but we had to effectively try to figure out how to morph our business from workstations and a high price point to a channel business at a much lower price point and in all Kinda we didn't succeed particularly well. So that wasn't ended up getting sold and I went on to doing my next company after that, which was based out of London, selling software to corporations. As the IBMPC took off, we worked out that that they were all these hardware stores like computer land and business land, but nobody was focusing on the fact that really what made these computers interesting was software. So I started a business and at the time also co founded with this US venture called corporate software, and I did the European part of it and we then combined the two companies and the combined entity went public around a abou than s seven, I think it would have been approximately, or eighty eight approximately. Wow. So from a from a very early age, you've been in charge leading organizations that, even by today's measures and inflation adjusted dollars, are incredibly successful, incredibly large. Did you feel like you're sort of your childhood and getting to know and spending time with your father was the thing that prepared you? How did you how did you develop a point of view, in a perspective on business at such an early age that equipped you to lead all of these different organizations. Yeah, I think it's a great question. Strange enough, I think my father was the perfect example of what not to do. He had loved him dearly. He was a wonderful human being, but he was terrible as an executive and terrible as a businessman. So, you know, he used to shout at his employees and I just naturally cringed every time I heard that. I'm a very empathetic person and really care about how other people feel and that just, you know, just struck me as being you can't run a business that way. That's going to be disastrous. He was a good example of what not to do and I did. I think a lot of it came from just playing gut in instincts of how to survive because, you know, with the business fortunately grew pretty slowly, so I had time to learn a lot of lessons that. Ordinarily, and in today's start up world, you just don't have that time. Everything's moving at a much faster pace. Your competitors and moving at a faster pace, so you have to go really quickly and you need to have you don't you don't have much time to learn lessons and make mistakes today, but I had that time and I did make those mistakes and I think I ended up learning a lot of just common sense business things. And I will tell you one of the most interesting things that triggered some of my later on thinking was I had this nine month sales cycle in my very first business, selling to architects, and I sat down one day and I said to myself this, this just doesn't make any sense. What's going on in the cell cycle? Why is it taking so long, and what could we do to make it work better? And I figured out that the least six months of that was education, where they where they didn't know what cat was and heart would work and what it could do for them, and then in the last phases they really needed to see other customers using it, and then they had to figure out whether they were going to do in terms of financing the thing, where they're going to do at least or a suspensive sale. Both had different tax implications. And then, lastly, they were always pestering me about could they see this thing in a network, and networks in those days lands did not exist. So we were in the very early days of networking starting to emerge and I didn't actually have a network that I could demonstrate to them. So that was constantly a thing that caused everything to store. So when I ended up doing was I figured out if I could address every aspect of the sales cycle in an event, let's see what would happens. So I created a single day event. Brought these people in, the architects in. We had about seven hundred of them are so come through this event. They came in for the night beforehand and we set up this room where we brought our customers in and we set them carefully at tables next door to our prospects. We went through this idea visual presentation of you know what, how cat could could have changed things in history, which was just kind of fun and got people into a good,...

...lighthearted mood, and we used a comedian to get the audience talking to one another, because we knew that if they didn't have something like humor to get them talking, they would just sit there stiffly at the tables and not talked about neighbors next door to them. The comedian worked really well and then the next day we ran the educational portion. We had a financial person coming and talk about least versus suspensive sale, and we pre qualified them for how to get financed. And then, for the first time ever, I had a network set up and it was able to show exactly how several architects could get church share documents together, and I had this room where we had a whole bunch of customers and their drawings everywhere around this room, so you could see and talk to customers. So we effectively try to address every part of the cell Cypeon and a strange thing happened. At about two o'clock that day, the first customer came over and said I want to place an order and we never expected that would happen. So we quickly had my assistant type up this order form, run down and get a photocopied and all of a sudden, in that one day we did four million dollars worth of business, which was more than we done a whole twelve months previously. So that was the first the origin of me starting to think about I had the scientific mind, this engineering mind that came out of my computer science degree, being applied to the sales process and try to think of think about you know, there's an art in sales and there's a science in sales and if you can match those two things and apply both science and art to to what you're doing there. And I think to me the art of selling is about understanding your customers mind and really being an expert at reading what they're thinking about and why they're not moving quickly when you want them to move quickly. What why are they not doing the step that you want them to take? And then the science part of it is is thinking in terms of metrics. You know, how does this funnel work in terms of metrics? While you put a certain number of people in and you move them through steps and they could they either convert they don't convert. What's your conversion rate? So you end up with these metrics that come out of it. So I think you find that that that thing that happened back in the s being actually was in the s that particular event has been highly influential for all of my later stage work. That was all about, you know, how to how to bring more of the scientific process to what had up until recently, I think, in the early sad art sales has never really thought of as being a very scientific and, you know, measurable metrics or entered data oriented process or entered thing. It was really much more about how you have these fabulous sales people that really know how to excel at closing large accounts with their charisma and charm, etc. When did you discover your love? Or did you discover your love? But when did you discover your passion for recurring revenue businesses? I mean, obviously anybody that's worked in recurring revenue business versus a transactional business. As an entrepreneur myself, I've discovered my passion and love for them on the first of every month. But when did you realize that sort of Sass and or, you know service, basically turning transactions into an ongoing service, was the future of business? Yeah, yeah, let's so in two thousand and three I invested in this company called Jay boss and they were making a free application server that competed against the IBM websphere product, and there was another one out at the at the time that I'm blanking on, but anyway, the important thing was that they had about five million people that they had given a free version of their software to the open source downloads and we had to figure out a business model to turn that into to revenue for them and the the initial idea behind that was, okay, let's sell them support and get them into just an annual contract so that they could actually get support, because larger enterprises were never going to use open source without that throat to choke and support was the way to give them confident comfort that they could use it and put in their production. So we created this annual subscription and it was an interesting idea because in not just support, over time we ended up putting lots more things into that, like there...

...was, in particular, some some important software that went into that and effectively that was the very first Sass a experience that I had and it was before the real explosion in suds which happened, I think more out about two thousand and eight. Two Thousand and nine was the early days of things like hub spartans and desk taking off. And what happened was we started to realize that you know, if you, if you've ever run a business based on license sales, at the end of the quarter you feel great for about one day and then the very beginning day of the next quarter you were as Oh my God, I've got to do that climbing of that mountain all over again and try to recreate that revenue, because everything I booked and build the last quarter is gone and is is no longer going to be of any help to me and if I don't book brand new deals, I'm going to have zero revenue this quarter. And that was an incredible change. When you get into recurring revenue, you start off with everything that you had last quarter and everything you've signed up now that's new is additive on top of that. That was just a mind blowing the incredible business model, the thing to give you comfort as an entrepreneur, and you also realized that as investors, when you're working with companies, one of the most valuable things is to have a predictable business and companies that were out on Wall Street that had any kind of a quarterly miss would get punished heavily, and if Wall Street could see that there was something that was going to be really predictable, they would love it. So that was that was here two thousand and three when I fell in love with it, and it took a while before we saw then Sass businesses emerging and you know, two of the very first investments that I got involved with that in the sace area was end us can help spot send us got past across to my west coast partner because he was more easily able to handle that board seat than I was. But both of those were obviously fit a new kind of a model for what software was was looking like. First of all, they addressed the SMB and not the enterprise and as a result of that they had to come up with a much different sales model that was follow a cost than the old enterprise sales model because the price points was so much lower. And we was super excited about how the SASS model would enable SMB's to finally use technology that they haven't been able to do before, because the cost of having an it department to use that stuff was something that was always prohibitive to them. I remember, I mean this is a perhaps too graphic, but two thousand and ten I was working at a company called axial and our founder, Peter Laherman, had photocopied pages from your website that listed out and explain Sass metrics and he hung them in all of the bathrooms. So as we were using the bathroom we would be staring at CACTEL TV and trying to understand when nor rain which I think was brilliant, but so to the point of, you know, the explosion of Sass, I feel like. I feel like at least you popularize, if not invented or created or derived a lot of the key frameworks with which we analyze SASS businesses. A is that accurate and be I guess, walk through the evolution of how you came to use all of these different frameworks to analyze a business effectively? Yeah, yeah, excellent. Well, yeah, the thing that I realized was when I talk to my partner's about what was going on inside of a SASS business, they would struggle because they would see us burning a lot of money and they wouldn't know why we were burning that money and they would their constant sort of request to me is, you know, let's reduce the burn rate of this company, and I said, well, no, you don't want to do that because this business is really successful. And the reason why this was happening is that they were used to using traditional gap accounting statements, PNL and balance sheet to understand if a business was doing well, and those totally failed to describe what's going on in a recurring revenue business, because you end up spending a fortune to acquire the customer in the early stages of the relationship with them, you don't make that money back for quite a while and the net result of that is that, on a per customer basis, you really negative cash flow for...

...quite a long time, and it only if you've managed to keep that customer for several years do you really start to become profitable on that investment. And if you take that across many, many customers, you end up with again a very serious cash flow problem, or at least a profit and loss problem for the business. And getting people to understand why that was a good thing to be losing that money in some cases and a bad thing in certain other cases was a fundamentally needed problem to be solved, and that's why I thought unit economics were, by Feign where the best solution to that. And that really meant, you know, looking at LTV of that customer and the CAC for their customer and realizing that if you're going to have a great business, you'd have to have much more LTV than than it costs you to acquire them, and also then thinking about the cash flow side of it. That led me to this other metric which I think is extremely important, which is months to recover CAC, and I came out with a couple of guesses in two thousand and eight about what those metrics should be. My guess was that LTV to cat should be at least three times and that you should try to get monster recover cat to be less than twelve. And in retrospect I think they were pretty good guesses. Pretty dead still the standard. Yeah, and so I would probably say right now that when I look at businesses that are really doing well, on average, their LTV to cack is probably more like four and a half or higher for the really good businesses. But I think at a minimum if you're not near three, you should, you know, stop trying to exam that business and go and fix that particular thing. And then if I go back and I look at months to recover CAC, that's really a metric that talks about how capital efficient the business will be and and what it's what I've discovered is that it back in those days it wasn't easy to raise large sums of capital for a SASS business, so twelve months was a very good target to and for these days it's actually much easier to raise pretty large amounts of money for as Saspers, and so you could be more relaxed on that and I would probably say eighteen to twenty months would be you don't want to be higher than that for the long term. You might be higher for your early state, early days, but after period of time you certainly want to try to get below that and if you can. The really great businesses are definitely in that twelve months and below range and they consume very little capital. So the founders end up owning tons more of the business by the time it reaches some kind of a point where this liquidity and they can get, you know, some kind of exit for their shareholding. So I relax the twelve months, but I think and that the three months thing, I would probably make that a little little higher and say, Hey, if you really want to be successful, you probably should be thinking about more like four or above. When you look at some of the great businesses and on the stock market like zoom, they're up above nine times. I'll the VATIC cat. So first just to get our definition straight. When you think talk about monster cover cack, is it revenue or is it is it, you know, gross margin or operating operating profit? As you're thinking about the comparison against the CAC expanse. Yeah, so, so that's a good question. I originally used to think, Hey, every SASS business is going to have a really high gross margin percentage, so you could look at just revenue. Turns out that's not true. There are quite a lot of businesses out there where they actually have lower gross margins and because they have to use a lot of people to deliver their service. So I think you have to look at gross margin and what you're really looking at is, for an average customer, what is the gross margin dollars that you will receive? So let's say you sold a customer. An average customer pays you tenzero dollars per year and your gross margin is something like seventy percent, so that you are then making sevenzero dollars from that customer. So that tells you that your cack, if you want it to be under twelve, recovered in twelve months. You can spend Sevenzeros to acquire that customer, and it's very useful to know that because now all of a sudden you can work out how much money you can afford to spend...

...on sales and marketing just based on your price point. So if you, for example, of trying to sell something for only fifty and your gross margin is, say, eighty percent, you're any making forty per customer. Well, guess what that tells you? You shouldn't be spending much more than forty, two, maybe sixty to acquire that customer, particularly if you can't retain them for a good long period of time, because you're just not going to be profitable on that business. So that's it's useful to put that formular into reverse to figure out, okay, based on my pricing and my average gross margin for customer, how much can I have thought to spend on sales and marketing, which was what we just did? Give her worry at this is my worry. So you can, as a professional investor, which I am not, you can tell me if my wearies misplaced. I worry that early stage companies describe and discuss and present l TV data that is completely unrealistic given their age as a company. And maybe they've had one or two cohorts that are representing a reflective of the ALTV data, but the reality is that they've only been around for three or four years. So for them to say that their LTV is you know that that they're on average a customer stays with them four years, five years. It's not provable because they haven't been around for four or five years. Do you ever worry that LTV gets dramatically inflated and sort of optimistically presented? Well, you've just raised a great point and I really feel like I'm partially responsible for a lot of entrepreneurs focusing on LTV, to CAC and monster cover cack way too early in their life cycle and I'm I kind of have tried to rep solve that problem with with later materials that I've produced. So, if you don't mind, I'd love to go through this new framework that I figured out. That I think is one of the most valuable ideas that I came up with, and it's the notion that most of the mistakes that are made in a the big mistakes that made by startup founders, is that they try to rush through the stage that they should be focusing on and jump to the next stage too quickly, and I came up with a nine stage model to get to what I think really could do you a successful business, and that is when you have a repeatable and a scaleable and profitable growth model. And in those nine stages that I think it's super important to recognize that you're just too early to calculate LTV TO CAC when you're still trying to find product market fit or if you're in the early days of trying to figure out a repeatable so ell's motion while you don't have anything really that's repeatable enough to measure it that much in time. So don't you know, don't bother estimating your LTV or your cack at that stage. It's only when you've got something that's fully repeatable that you also know is scalable and you've started scaling it and have figured out what it costs you when you start to scale it, because now you got to generate leads at scale, you've got to find salespeople at scale. Then you finally end up with valid metrics for CAC and you have a decent enough picture of what your LTV is, and that's why the last phase in that sequence of nine steps there is make it profitable. So let we could squickly go through the steps. There's two big phase. The first one is really all about finding product market fit and the second phase is all about building this repeatable, scalable and profitable growth process and then once you've got that, you then would hit this the accelerator pedal and start scaling like crazy. And what I've done with the nine steps, as I've broken those earlier, to the fine product market fit and the search for repeatable, scalable and profitable growth downe into these nine steps. So briefly, to kind of go into this a little bit, because I do think it's super powerful as a framework for entrepreneurs. I'm not going to cover the product market fit thing because I think that's been well discussed and pretty well understood in the whole lean start up movement. But it's after you found product market fit that you start trying to figure out how do you sell something, and I think the one first step in that is that the founders need to get out there and figure out if they can actually sell the product and make several sales...

...and figure out at the point in time where the making several cells, is what they're doing repeatable and could they describe what they're doing to a ordinary salesperson and have that ordinary sales person be able to repeat what they've done? Sometimes the funders are not good enough on their own to do that. So I recommend that they bring in what I call a trailblazer, pathfinder, sales rap who's a specialist kind of person. They don't like to work with predefined motions that are, you know, the meet and potatos for an ordinary sales person, but they're very good at helping you find the path and figure out what is the the motion that you're going to teach to these more normal, ordinary sales people that you bring in later on. And so at the end of that you should have this really a defined notion of who you're selling to, what price point you're using, what message you use when you talk to them, what the objections are that they come up with and how do you typically overcome those? All of these different elements of the sales motion have been figured out at that point in time and tested with, with more than one account, and now you're actually ready to bring on a salesperson and test out and see whether that works or not. And that's when you start working to see is this been repeatable when I bring in, you know, just ordinary standard reps? And then once it is repeatable, then you try to figure out it. Can we scale this? You know, can we add another two sales people and they still both become productive of in a short, you know, predictable period of time and learn how to do this motion that we think is repeatable here? And if that is scalable, then I think you typically see that you got run into a churn problem very frequently around that stage, because now you've become very good at signing up lots and lots of customers and you start realizing, okay, not all of them are sticking around as long as we should decid how do we solve that. So that would be step number seven in that processor. And then the last step eight is is let's get up, let's make sure that this process is profitable and really focus in on how do we reduce CAC and how do we optimize the lifetime value and make sure we've got our metrics in order for as to really hit the gas on the thing. And so, if you think about it, if you can make that motion for repeatable and scalable and also profitable, you've actually built a cash generating machine and it's really something that you want to run as fast as you possibly can do put as much money into it as you can do, because it. Every time you put money into it, it's scales and it repeats and it generates profit for you. So that's when you are ready to enter that last phase where you should hit the gas and just scale like crazy. And where I see funders going really badly wrong is they try to skip ahead, and actually board members and investors are very frequently responsible for this, and they will encourage them to hire a ton of salespeople before they've actually got a motion that is really ready to have those sales people work on it, and they just burn a ton of cash, waste time and end up discovering that they got to come back and spend the time to finish off figuring out how to create this repeatable sales process, and it's much harder to do that if you've got six sales people that if you've actually got get a couple of founders and one of the person working with you, because you've got tight communication and regular insights coming out of every meeting that you can discussed to do that. Do you think that? Of course it makes sense. I A bunch of follow up questions. The one of them is it was all to my understanding that series a was about to your point, still in discovery mode, maybe not discovering product market fit, but to that point of discovering repeatability. And then series B, particularly at the size of the financings that we're seeing, you know, sometimes thirty million, fifty million, sometimes even a hundred million. Series by. I see hundred million more it series c these days. But these are very, very large investments of capital and they seem to be, or at least see the companies I've worked with, some of the companies I've consulted for Miss Aligne to where their business actually is. Is there a mismatch between the amount of capital in venture capital and the natural growth...

...rate of these businesses to follow along through those nine stages? Yes, there really can be, and it's it can be incredibly engine it's very interesting that you say, because I literally just wrote, I think it was two days ago, an email to one of my companies that it raised a large sum of money, saying, you know, it's essential that we get a ord defined planning place, because one of the biggest mistakes that I see companies making up they just raised a big chunk of money is raising expenses way out of whack with where they are in the business process. The cycle of these nine steps, etc. So yes, there is. There's a grave danger here that you can raise a lot of money and that will encourage you into thinking that you're ready to start scaling when you're really not ready to start scaling and you need to follow the sequence of events here and keep your expenses tightly under control until you're ready to cover this, this whole series of steps to being repeatable, scalable and profitable. The reason why I say it's important control expenses there is it's not predictable how long it's going to take you to either find product market fit or to get this repeatable, scalable and profitable sales process. So the last thing you don't want to be doing is burning through all your capital and finding that you don't have what you needed to be be successful because you try to scale too early. Do you find my love? Do you find that you're the that probably isn't a consensus perspective around the table of a board meeting, given some of you know other investors may have an exactly the opposite opinion, which is go, go, go. You know we did. We gave you thirty million dollars so you can spend it, not so you can leave it in the checking account. Does that put you in a strange situation sometimes with some of the companies where you're an early stage investor? Yes, definitely. You know, it's kind of horrifying that it's true, but I'm frequently the investor who's WHO's really arguing way to second guys. We are not ready to do this and let's just tame expectations done here and let's finish the sleep of the sequence of steps that we've got to go through before we are ready here. And, strange enough, I'm it's also odd for the poor founder when they come out the far end of that process. Like I remember the hub spot guys in the board meeting where we told them that they were actually ready to hit the gas and start hiring to sales people a month and they really had a fit because they've been saving money so carefully and not hiring people and being super cautious about any kind of expenditure and all of a sudden we were telling them to hit the gas and they were sort of surprised that we're just like we're going from this one mindset to the southern mindset and realizing that, yeah, that's very stage specific and where you really have the data that tells you ready to go. You got to change mindsets and I sometimes see, you know, those same board members who are pushing too early, are not pushing hard enough when they should be pushing hard enough, which is when the data really indicates that you are ready to go. So, yeah, I'm often at odds with other players around the table and have to, you know, justify my position and get people to buy into it. Well, they should be so lucky to have you at the table in the first place. As my perspective, now we're you've done a tremendous amount of work. You know, we talked at the top of the show about the science and the art of sales, and one of the things you've done a lot of work on a sort of funnel design and you've looked at how funnels can unify an align and entire business all the way from sales, I would guess, all the way through to the engineering team into the people that are building the product. Walk us through some of the insights that you've developed as a consequence of studying and thinking about and dissecting funnels? Yes, if first the first insight is one that you've just said, which I just like to repeat because I think it's so powerful, is if you take a SASS business, the funnel is one of the most powerful ways to align the whole organization so that they all understand what they're trying to achieve and are all pulling in the same direction. So, as an example of this, let's take something like the product group. Well, in most organizations that I start working with there's often a problem where the product group is siloed from the marketing group, that siloed from the sales group that may be silent from the customer success group. But if you think about what's required to get a funnel to work,...

...the product people can have an unbelievably powerful impact on whether a product sells well, because these days free trials are really one of the most potent weapons that we use in SASS cell cycles. It's the product experience that determines how well that free trials going to go and from a customer sturnepoints are free trial goes great, it's a big reason why they're going to buy or not buy. So you need the sales people in the product people and the marketing people, a customer success people all aligned in a group that thinks about the funnel and where it's blocked at this point in time and what solutions we could use to address that. So sometimes the product people can be one of the most potent groups at solving those problems. Sometimes it's a customer success people that have to think about on boarding. Sometimes the salespeople are involved in fixing a churn problem because they're overselling the product and so, you know, they need to change how they're positioning things and make sure that the compensation is aligned to prevent them from overselling and therefore having that customer just churn out a few months after they signed up, which is not great. So where I like about funnels is they can be actually brought down to to formulate, and that's incredible that you could simplify a business down to, you know, to formulates. The first formula is the overall funnel, the metrics for success. There are some simple, which is, how many people do you put in the top of the funnel? Multiply that by the conversion rate and then multiply that by the average deal size, and that tells you how much you're going to be booking in any particular quarter or month or whatever. So that's really nice and simple and it's interesting because once you know that, then you start to realize, okay, if I can get our organization to double the conversion rate of our free trial, we will double the bookings that we have here. Or if we can double the number of people we put in the top of the funnel, we'd also double bookings. So you now have this really nice, simple formula that governs how well you're going to do as a business. And then the second thing that happens is once you start adding in sales people, that formula that I just gave you there, that's nice and linear, doesn't scale linearly any longer because a single salesperson has a capacity limit. So if you bring into on sales person and you start bringing in more leads and they can handle you won't get more bookings. You have to actually add a second sales person. So you need a second formula when you have a sales organization, and the second form is also nice and simple, thank God, and it simply says treat the number of salespeople you've had and multiply that by the average sales productivity and that will equate to your bookings so if you are ten salespeople and each salesperson's capable of delivering five hundred Cape around them of bookings on average, then you've got yourself a five million dollar booking machine for per year with that group. There's so long as you keep that average productivity up as you add new salespeople, and then it doesn't drop. So it's super useful again to look at those two things. That one of the biggest mistakes I see people making is they don't have fast enough. They think it's okay not to have fast enough because they're kind of saving money by hiring slowly, but it really isn't in a sales organization. One of the biggest reasons I've seen sales organizations missing plants that they didn't have enough salespeople. Hard they didn't have the sales capacity to do the business that they committed to in the plan. So you have to build a really great a recruiting machine internally, and that is something that I took a lot about on my blog of the importance of being great at recruiting to create a good sales business. I've seen, and I'm sorry, I was going to say I've seen a bigger problem on the other side, and curious on your reaction, which is that when you're building a revenue plan as you describe, salespeople times average productivity, the understanding of how demand is generated is obscured a little bit. And so the far bigger problem I've seen as people hire too many sales people without understanding that sales people need to be fed and that they need to be to demonstrate an ability to scale and generate leads and and qualified opportunities to feed those sales people, unless they assume that the sales people are going to be doing all of their own prospecting and so often hamps. What I see is a sales very large sales team...

...with not a lot to do. Yeah, yeah, actually, you are right, and I should quite out that that is that is a bigger problem than the one I describe where they didn't hire enough sales people. That's a more, much more common problem and it is exactly what I was going to discuss. Second which was, you know, how do you get the sales productivity to state constant? And certainly one of the big aspects of that is you've got to make sure you can feed them enough leads and so one way that I recommend people do that is to have a reverse funnel math take place. So if you know that to close one deal you're going to have to have x number of opportunities, because you know your opportunity to close ratio your conversion rate, and then to get an opportunity, how many sales accepted leads do you have to have and how many emptuls do you have to have to get on sales acceptedly? And by running that reverse math all the way through, you should be able to figure out particularly importantly, is how many emptulls does marketing have to generate for this size of sales organization? And that now gives you the contract that you formed between sales and marketing that aligns those two organizations around the exact same thing that they have to do now. And you know that that says so dead right. You know you really raised a very good point. Then it's fundamental to how you keep the productivity pat sales person high is that you are able to feed them. But it's also interesting to note that there are other things that you can do to help sales productivity. Like one of them is doing a brilliant job of onboarding the sales people and really teaching them about Your Business, about your customers and about how to sell. And I see a lot of companies skipping over that and spending a lot of money to how these very expensive people and then just not putting the energy and effort into make them productive. And that's that's good, and other mistakes a huge but it's nice. I'll be the math of these formally bring out this great discussion that you and I having here, because, you know, you pretty quickly realize, okay, if we got to make this math work here, then we have to get into these art questions like how well can we do it on boarding sales people or what techniques are we going to use for legion? And it's yeah, yeah, now, I mean it's it's the math that needs to be done to understand how the business performs. David Work, were coming to the end of of our time together. It's been an incredible conversation. One of the things we like to do at the end is pay it forward. We like to highlight either other from your perspective, it could be founders that you have deep admiration for, maybe companies that you've recently invested in that you know you want to do are a little free PR for other investors that you think very high Laya or that we should know about. Who are some of the the INFL ORLENCES or some of the people that you'd like us to know about that have impacted your life? Yeah, it's a great, great point. So certainly inside of the set of people that have really influenced me, I obviously want to highlight some folks that people do know about, like Brian Halligan and Damesh Shah and the the whole management team over at hub spot. It turns out that that group were just in spectacularly powerful and helpful at influencing and helping me understand the SASS business while I was going on that journey with them, and they were terrific thinkers. They had all gone through, at not all of them, that, a lot of them have gone through the Sloan Management Program at Mt, the NBA program at Mit. So they thought with a very mathematically oriented mindset about the business they were building. And then one of our board members that we had a hub spot was a person called Gail Goodman who was the CEO and founder of constant contact and she was really earlier to Sass than we were and so she brought in a bunch of ideas that were super valuable and important. So I'm always very grateful to gail. Then we learned a ton from the folks at Jay boss that the CEO There was extremely talented. There were many other talented people at Jabos and also a Zend us was another organization where Nichols Vain, who's the CEE and found of their has been super influential on me and helpful in getting me to learn much of different things there. So that's a group that I would would give thanks to and say they had enormous influence on me learning...

...what I love it. There are folks that are listening that, I'm sure our are incredibly impressed. Maybe they want to reach out to you. Maybe they are entrepreneurs that want to talk to about their business. Are you, I guess to part question. Are you open to two folks reaching out that here you on the podcast and if so, do you have a preferred method of communication? Yes, very open to it. An emails generally the best way to do that and my email is just des Kokd skulk at Matrix potnesscom. Wonderful, David, thanks so much for being on the show. And we'll talk to you on Friday for Friday fundamentals. Perfect, my pleasure. said, everybody, it's Sam Jacobs. This is SAM's corner. What an incredible interview. It was really just an honor to have David on the show. I've been following David's career for a long time and you can hear from the enthusiasm and his voice how how excited he is to help founders, entrepreneurs in their teams grow and and scale businesses. And he talks about you really need to go to his blog for ENTREPRENEURSCOM and go through some of the materials. But he talks about this critical step that is often missing between product fit, product market fit and scaling, which is go to market fit. Marco bears just talked about this as well. It's it's when, before you pour gasoline on the fire because you think you've got, you know, some embers glowing, let's make sure that you know how to start fires repeatably, which I think is blaboring the metaphor a little bit, but the point is that there's nine steps and that too many people are focused on the fur that sort of the first sequence, which is product market fit, the discovery process and then scaling immediately from there. And not enough people are focused on the discovery process around go to market, fit discovery meaning understanding what the price points are, understanding what the sales motions are, understanding where your customers live. I think it's just really, really important what he's talking about, which is, before you spend a tremendous amount of capital, understand the business and how it works and also don't Miss Supply metrics. You know, so if it's a super early stage company, it may not be appropriate to be talking about LTV, especially if the company's only a year or two years old, and it doesn't matter. You know, you can call the LTV five years but it may not matter. I still think that understanding the general ideas behind the unit economics is important. And there David and I may disagree a little bit. What I mean is that the numbers are always telling you something. It's important to understand what and they're always telling you something about how customers are enjoying your product, what they think about it and whether or not it's appropriate to keep going. And there I think we both agree that listening and understanding the metrics, particularly LTV, particularly CAC and particularly payback period or, as he calls it, months to recover CAC I think is very, very important. I think one of the things that he mentioned is looking at gross margin contribution as the mechanism against which to understand how much you can spend on sales and marketing acquisition. The problem most of the time is that it's not quite clear how to measure gross margin in a SASS business. It's not obvious because the most of the time gross margin is whatever you sell times less the cost it required you to produce that marginal item. But the cost of software is typically zero. So figuring out software gross margin is is complicated and most people are probably going to be overly optimistic. At any rate, he's a much more men than me, so I and he's built a number of successive businesses. So I would really go back and listen to that appisode again. We've got this Friday fundamentals coming up. It's going to be the long one, of the longest ones, I think the longest one because he's going to walk you through what a biercentric funnel is. I would listen to that one as well. Matrix partners is outstanding and truly David Scott is one of the earliest thought leaders, one of the pioneers of Sass, and he's an operator, so he understands how businesses are scaled. So it's been a great show. Thanks for listening. Before we go, let's thank our sponsors, Congo, the leading end to end digital document transformation suite, and outreach, the leading sales engagement...

...platform. Remember, if you want to get in touch with me, it's linkedincom. Forward the word in and then forward. Last Tam F Jacobs, please do give our show four or five star ratings on Itunes so that we can be at the top of the heap and and get more and more listeners and share some of these ideas with the world, and I look forward to talking you soon. I'll see you next time.

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